Germany's CDU Stands Firm On Tax Cut Plans

by Ulrika Lomas, Tax-News.com, Brussels

06 October 2009

Determined to present a united front during initial negotiations with the Free Democratic Party (FDP), leaders of Germany’s Christian Democratic Union (CDU) and Bavarian sister party the Christian Social Union (CSU) have finally agreed on a common line of attack: talks are to focus on the key issue of tax cuts – though without mention of a concrete timeframe.

With talks between the future Coalition parties due to commence this week, the Union is determined to raise the issue of tax cuts to the top of the political agenda. Yet despite having outlined a common strategy ahead of negotiations, the Union has, nevertheless, failed to decide upon a precise timeframe for implementation of the proposed tax reductions. While the CSU championed the introduction of further tax cuts from 2011 during the last stages of their election campaign, the CDU remains resolved to leave this matter open.

Indeed, before making any decisions regarding changes in taxation, CDU Party Chairman Volker Kauder has emphasised the need to review the current budgetary situation, to consider potential for economic growth, and to consider the government’s commitment to repaying state debt from 2011 – a provision that has recently been inscribed in Germany’s basic law.

Although both parties have expressed their resolve to cut taxes following the elections, clear differences in tax policies remain.

Chancellor Angela Merkel’s counterpart FDP leader Guido Westerwelle has repeated his calls for faster and deeper tax relief. The FDP is determined to create a simpler tax system comprising just three income tax brackets: 10%, 25% and 35%. This would mean lowering the first rate of income tax from 14% to 10% and also drastically lowering the top rate of income tax from 45% to 35%. Cuts in income tax of this scale are thought to amount to tens of billions of euros per year – clearly out of the question for Angela Merkel and the CDU.

Although the CDU is in favour of implementing tax reductions, it intends to progressively reduce the lowest rate of income tax to 13% initially, and then further to 12%. Regarding the tax levied on top earners, the Union plans to increase the threshold for the top rate of income tax (currently 45%) in stages, raising it from EUR52,552 to EUR55,000 in the first instance, then finally to EUR60,000. The party does not intend, however, to alter the rate. For Party Chairman Volker Kauder, the key issue is to address the issue of fiscal drift (kalte progression). The Union are determined to prevent future wage increases being “swallowed up” in taxes.

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